New circumstances in life can create a sudden need for cash, even in your golden years. For example, you might need major home repairs or want to consolidate debts.
In such cases, a home equity conversion mortgage might be the answer. What is an HECM, how can you use it, and where do you get one?
What Is a HECM?
A HECM is a particular type of reverse mortgage available only to seniors. This loan allows people to get cash by leveraging the equity in their homes.
The Federal Housing Administration backs HECM loans and has been doing so since 1989, making this a reliable option for many. In fact, the agency reports that it issued over 64,000 such loans in 2022.
How Does a HECM Work?
As a borrower, your and your spouse’s (or co-applicant’s) ages, interest rate, and property value helps the lender determine the total loan amount. Typically, older owners who have higher-value homes are able to borrow a larger sum.
If you are still paying a mortgage on the property, the HECM first pays off that balance. You can then choose whether to receive your disbursement as a lump sum, monthly payout, or line of credit.
You have no required monthly payments with a HECM but are still responsible for homeowners’ insurance, property taxes, and maintenance. Like most loan products, any payments you make go toward interest first, then fees and principal.
Another benefit of the HECM is you have no prepayment penalties. However, if you decide to sell the home or move to another primary residence, you have to pay off the loan.
Also, when a person with a HECM passes away, the heirs must settle the account. They could sell the property or purchase it for either the amount due or 95% of the home’s value, whichever is less. Heirs could also walk away from the home without any financial obligations by signing the deed over to the lender.
Is There a Difference Between a HECM and a Reverse Mortgage?
A HECM is a type of reverse mortgage, but not all reverse mortgages are HECMs. A reverse mortgage is any loan where you use the equity in your home as collateral. What makes HECMs so popular is their government backing to protect lenders, the loan’s flexibility in use, and the lower interest rates borrowers can receive.
Other types of reverse mortgages include proprietary and single-purpose loans. Single-purpose reverse mortgages are tax-free and can be easier to qualify for, but require you to use the proceeds for a single preapproved reason.
On the other hand, proprietary reverse mortgages:
- Permit unlimited uses for funds
- Often have no upfront mortgage insurance fees
- Allow younger borrowers to qualify
- Offer larger loan amounts
However, these usually have higher interest rates, only a lump-sum payment option, and fewer protections than HECMs do.
Each product can be a viable option, depending on your situation. Learn more about reverse mortgages and talk to a helpful lender who can help you determine which type is best for you.
How Does a Home Equity Loan Differ From a HECM?
Another popular loan type for homeowners is a home equity line of credit. The HELOC also uses your home’s equity to provide you with cash. However, you have to make monthly payments with this loan.
HELOCs also only come as a lump sum payment, and a lender could freeze your credit line if your home’s value sharply drops, though this is usually rare. Also, a HELOC has no age restrictions, opening it up to all homeowners with sufficient equity.
If you think a HELOC might be better for your needs, talk to a qualified home lender to find out more.
Who Qualifies for a HECM?
As a government-backed program, only certain individuals and properties qualify, regardless of the lender. However, a lender might have its own additional restrictions in addition to the FHA’s requirements below.
To qualify for a HECM, you must:
- Be at least 62 years old
- Own a home and continue using it as your primary residence
- Own the home outright or have a low mortgage balance
- Not be delinquent on any federal debt
- Attend an information session by a U.S. Department of Housing and Urban Development-approved counselor
Your lender will also verify that you can continue to make payments on standard property expenses, such as taxes, insurance, and homeowners association fees.
Additionally, the property itself must meet the following standards:
- A manufactured home that meets FHA standards
- A single-family dwelling
- A multifamily property that you occupy
- A condominium in a HUD-approved development
Borrowers who want to use a different type of property as collateral should investigate other loan products.
How Do You Apply for a HECM?
Applying for a HECM can be easy when you find a reliable financial institution. Once you find a HUD-approved lender, you should talk with a loan officer, who will guide you through the process.
The professional and neighborly staff at Associates Home Loan of Florida is always ready and willing to assist!
Pros and Cons: Is a HECM the Right Lending Choice for Everyone Who Qualifies?
A HECM may not be for everyone. The following pros and cons can help you decide for yourself.
A Few Pros
The benefits of a HECM include:
- Loan costs that are usually lower than proprietary loans
- Tax-free income
- No change to your Medicare or Social Security benefits
- Large cash advances without having to sell or move out of your home
These advantages are why HECMs remain popular among senior borrowers.
Like other financial products, a HECM may not be the right choice for everyone. The potential drawbacks include:
- You can’t deduct your interest until you pay off the loan.
- The initial costs and variable interest rates might become too high for some borrowers.
- You have servicing fees and mortgage insurance premiums over the loan’s life.
- You could lose your home if you don’t repay the loan.
However, these conditions don’t have to be a problem for responsible borrowers. If you assess your budget and create a reasonable repayment plan, a HECM can be a smart solution.
Chat With Us to Find Out If a HECM Is Right for You
Whether you need money for an unanticipated expense, want to consolidate debts, or simply desire more cash on hand for peace of mind, investigate if a HECM will work for you.
Talk to the experts at Associates Home Loan today for friendly guidance on finding the right financing solution.